Dukascopy TV and Commodity Broker Carley Garner talk Coffee Futures

Text transcript of this interview:

1. Arabica coffee futures on ICE rose to a 3-1/2 month high at the beginning of August, do you think coffee futures will continue to rise during the short term?1. Arabica coffee futures on ICE rose to a 3-1/2 month high at the beginning of August, do you think coffee futures will continue to rise during the short term?

I do feel as though the path of least resistance remains higher in Arabica coffee futures traded on the ICE exchange. However, I also believe the upside will be relatively limited. Based on the latest Commitments of Traders Report issued by the Commodity Futures Trading Commission, there is still a significantly bearish position being held by speculators. Unfortunately for them, it feels like prices will continue to squeeze them out of bearish trades, which forces futures traders to buy back their short futures. This, combined with concern over the quality of current supply, should keep the price of coffee grinding into the mid-$1.50 area but we doubt prices will find a way to move above such levels.

2. Thanks to the El Niño climate phenomenon the two-year drought that was threatening coffee production in Brazil seems to have lifted. However, experts suggest the country is not out of the woods yet. Do you see this continuing to influence coffee futures?

In my opinion, most of the El Nino weather concerns have already been incorporated into pricing. The coffee market has built in a premium to account for it. Residual concerns will likely help move coffee prices higher in the near-term but again, I suspect $1.55ish will be a ceiling for Arabica coffee futures.

3. Rodrigo Costa, director of trading at Comexim USA, has said the coffee market has been following the whims of the commodity index, not the fundamentals of the coffee market. What do you make of this statement?

I do agree that the coffee market is being influenced by outside forces. However, in my opinion, it’s correlation with other commodities is the direct result of changes in the currency market. For instance, when the US dollar moves lower it creates a scenario in which commodities priced in dollars appear cheaper than they once did with all else being equal. Accordingly, the price of those commodities often moves higher in sympathy as low prices lure demand. On the flip side, a higher dollar often puts pressure on dollar priced commodities due to discouraged demand. The US dollar is down 7% on the year which has offered support to the commodity markets, including coffee.Although the negative correlation between coffee and the greenback will vary in degree, it is currently significant. Over the previous 180 trading days the two markets have settled in opposite directions roughly 66% of the time. Further, the coffee futures market bottomed in late-June at the precise time aggressive sellers appeared in the dollar index futures. With this in mind, if the dollar finds a way to recover as we think it will, the price of coffee will eventually suffer.

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